Hookah served with food in restaurants to be taxed separately: WB AAR

Tobacco-based hookah will attract 40 % GST, while non-tobacco (herbal) hookah will be taxed at 18%

Hookah served in restaurants along with food must be taxed separately and cannot be treated as part of restaurant service, the West Bengal Authority for Advance Ruling (AAR) has held. In its ruling dated February 27, the AAR said restaurant food and hookah constitute two distinct supplies under the goods and services tax (GST) law, attracting different tax rates.

 

Accordingly, restaurant food will continue to be taxed at 5 per cent GST while tobacco-based hookah will attract 40 per cent GST and non-tobacco (herbal) hookah will be taxed at 18 per cent. The ruling came on an application filed by Indian Wire Products Company, which operates the restaurant “Pappu Chaiwala”, seeking clarity on whether hookah served with food could be taxed at the concessional restaurant rate.

 

Rejecting the company’s argument, the AAR held that the phrase “any other article for human consumption” in Clause 6(b) of Schedule II applies to items that are ingested and digested. Hookah smoke, which is inhaled into the respiratory tract rather than digested, does not fall into this category, the Authority said.

 

“Even if we stretch our imagination… we cannot put food, drink, and smoking hookah within the same bracket,” the AAR bench observed. The Authority further held that supply of hookah involves both goods and service elements, but the principal supply is the tobacco or herbal product used for smoking. Therefore, it must be treated as supply of goods and taxed accordingly.

 

Tax authorities had argued that several hookah bars were wrongly availing the concessional 5 per cent restaurant GST rate even though the dominant supply was hookah flavours.

 

Experts said the ruling could have significant financial implications for the hospitality sector.

 

“Across the industry, many restaurants offering hookah have been treating it as a composite restaurant supply and applying the concessional 5 per cent GST rate. The West Bengal AAR ruling fundamentally disrupts that position by holding that hookah is a separate supply of goods, taxable at 18 per cent in case of non-tobacco variants and at 40 per cent plus applicable cess in case of tobacco products. This creates an immediate classification reset for operators who have built pricing models around the lower rate,” said Manoj Mishra, partner and tax controversy management leader, Grant Thornton Bharat.

 

“The exposure could be significant. For outlets where hookah sessions are priced between ₹800 and ₹1,500, and form a steady revenue stream, the differential tax impact over several years may translate into sizeable demands, along with interest and potential penalty. Beyond the immediate numbers, the ruling sharpens the interpretation of composite supply under GST and signals a more rigorous approach to bundled offerings. Businesses will need to reassess historical positions, provisioning strategies, and contract structures with urgency,” he added.

Clearing the air  

• The AAR ruled that since hookah smoke is inhaled, it cannot be equated with items that are ingested and digested
• Tax authorities argued that several hookah bars were misusing concessional 5% restaurant GST rate
• Authority held that offering hookah involves both goods and service elements,with a dominant supply of goods (tobacco or herbal product)
• Experts said the ruling could have significant financial implications for the hospitality sector